When Lazarus on Ubuntu 12.04 starts, I get this error (screen shot attached).
Does this have an effect on the application been built?

After clicking OK, the IDE starts and I can create simple forms. But I’m not sure if this is the right thing to do.
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This is referring to the source for the free pascal compiler itself. It should not affect your ability to compile and run normal applications.
Having the compiler’s source is useful if you discover a bug in the compiler or want to build a cross-compiler to target a different platform than what you’re developing on.
I use Lazarus mostly on Windows but from a simple internet search on the error message it seems some versions of Ubuntu don’t/didn’t install the fpc source along with Lazarus. Check to make sure the
fpc-sourcepackage is installed. If its not there install it.Then make sure the path is actually correct. Most Linux installations I’ve seen have it as
/usr/share/fpcsrc/$(FPCVer)/. On Windows its usually$(LazarusDir)fpc\$(FPCVer)\source